Is Output in Asian EMDEs Approaching a Turning Point?

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CEIC WorldTrend Data Talk - May 21, 2015
The International Monetary Fund’s (IMF’s) latest World Economic Outlook (WEO) released in April this year anticipates output growth decreasing for some of the key emerging markets in Asia over the next five to six years. China’s real gross domestic product (GDP) growth is expected to slow down to around 6.3%, compared to an average of 7.6% for the past three years; the Philippines, previously at 6.7%, is predicted to average 6.2% annually by 2020, and output in Malaysia is forecast to grow by around 5% annually, a 0.5 percentage point drop from its recent trend. The WEO also warns that GDP growth is not likely to reach pre-crisis levels in any of the emerging markets and developing economies (EMDE), including those in Asia. This is due to factors beyond those directly connected to the crisis, such as ageing populations and human capital (i.e. the labour force and its set of skills and abilities). The question is then, are Asian EMDEs moving towards a lower, more sustainable growth potential?
Closer analysis on China, the most important Asian EMDE, reveals factors at play. Most recent Chinese growth indicators show deterioration, with the industrial production index (IPI) declining by two percentage points to 5.9% year-on-year (YoY) between December 2014 and April 2015, electricity production (reflecting industrial activity) becoming stagnant, retail sales growth in 2015 lagging behind its 2014 levels, and the money supply growth rate slowing since June 2014. The Lunar New Year public holidays, which took place at the end of February, were not enough to explain these declines. Longer-term trends, as well as continuing deflationary pressures, seem to better explain the slowdown of the Chinese economy. The GDP trend, put at around 6.3% annually by 2020, as per the IMF’s WEO, suggests that China’s growth may be past its prime and heading to maturity.
Over the medium term, more general factors will shape potential output growth. IMF forecasts show Emerging and Developing Asia’s growth fluctuating around 6.5% in the next six years, compared to a 7.6% annual average since 2009. Demographics in the region emerge as a major roadblock to speedier development. The proportion of working population (from 15 to 64 years old) has been decreasing since 2011 in the developing economies of East Asia and the Pacific to reach 71.1% in 2013. Although this ratio is still increasing in South Asia, it was lower at 64.8% in 2013, and the region is likely to follow a similar trend as birth rates have been declining sharply, while the cohort aged over 64 years has steadily been increasing as a share of the total population. All these result in deteriorating dependency ratios, expressed as the population aged over 64 years per 100 persons of working age.
Improvements in human capital and labour productivity, however, could push output potential higher. Despite growing in the past 20 years, labour productivity and education levels for the Asian EMDEs remain far below those of the advanced economies. Labour productivity rates in East Asia and the Pacific, and South Asia, measured as GDP per person employed, grew by 280% and 130% respectively between 1992 and 2012, but they remain far below advanced economies’ rates. North American productivity is still 79% higher than that of East Asia and the Pacific, and 86% higher than that of South Asia in 2012. Euro area productivity is 69% and 80% higher than that of the two regions, respectively.
The situation is similar in gross tertiary education enrolment as of 2012. This is measured as the share of students enrolled in an educational level higher than the basic subject-oriented education (in most countries that would refer to university or college), regardless of their age, against the population of tertiary education age. The proportion of persons enrolled in tertiary education in East Asia and the Pacific is 30% of that in North America and 40% of that in the euro area. The numbers are even worse in South Asia, with the share of the college educated population only 23% of that in North America and less than one third of the euro area’s college students.
As evidenced from the demographic and labour market statistics, it seems that the developing economies of Southeast Asia and the Pacific do have challenges ahead to sustain healthy long-term growth. The solution to the pressures of ageing populations and decreasing birth rates could lie in increasing labour productivity and moving up from low-skilled production. This in turn could only be achieved by investing in educating a higher-skilled labour force.
By Hristo Nikodimov - CEIC AnalystDiscuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription.
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